Sex wellness portals don't click with investors

Typing out Thatspersonal.com on your computer screen while at work will most probably lead you to a page that reads 'Access denied'.

An online marketplace for adult pleasure and sexual wellness products is not considered healthy viewing, even for purely work reasons -a reflection of what some of these startups experience when they knock on investors' doors: no love at all.

Experts believe that a notion of cultural taboo along with legal concerns come in the way of adult products portals such as Thatspersonal.com, ImBesharam and ItsPleazure from raising funds from institutional investors, despite dynamics such as 100% year-on-year growth and operating margins of over 30%.

“I think it is unfortunate. But I think that the reason why large institutional investors balk at the space is due to moral and cultural issues of the taboo factor around the space and grey areas around legal compliance,“ said Jaspreet Bindra, senior VP at M&M and an angel investor in Thatspersonal .com, which sells products for adult pleasure in around 50 cities in India.

The legal concern is that there is no specific provision of law that addresses the use or import of adult products. “It is all covered under the general umbrella of Section 292 of the IPC,“ said Lekhesh Dholakia, cofounder of Digital E-life that operates Thatspersonal.

“The enforcement authorities will use Section 292 and their interpretation of the law where they feel it applies. There is nothing in the Indian law that fits like a glove,“ said Dholakia, who is also legal advisor to the ecommerce portal. ImBesharam has it slightly easier than its peers since the company is headquartered in Atlanta, USA. The business, therefore, does not come under the purview of the laws here even though its market focus is India.

ImBesharam raised $4 million in a series-A round earlier this year from two high-net worth individuals based in Florida, but has found it tough to raise fund ing when it came to venture capital funds.

“Investors did express concern over lack of clarity about the laws that define the sale of these products in India. I think the VCs at the firm may have only wanted to invest in low-risk, low-payout models,“ said Raj Armani, cofounder at ImBesharam.

The company held funding talks with a Gurgaon-based venture capital firm and a Bengaluru-based firm, but failed to conclude a deal.

Unlike the traditional ecommerce space, online sexual wellness and adult pleasure product space is a high-margin business with legitimate business models.

The average order value for transactions across companies like ImBesharam, Thatspersonal and ItsPleazure is in the range of Rs 1,700- Rs 3,400. And they enjoy gross margins of 50-60% in an industry that is expected to grow four times to reach Rs 10,000 crore by 2020.

Clarity over the definition of obscenity in such a business is not the only sore point keeping investors at bay. There are other challenges to this business.

“Marketing is a bigger challenge. We are not allowed to market on Facebook or Google because the laws are not clear. So reaching out to the right target audience is also a challenge we face,“ said Divya Chauhan, cofounder of ItsPleazure, a bootstrapped startup that is in the market for funds. Tough foreign direct investment guidelines make it difficult for these firms to rope in strategic investors.

“The FDI laws make it difficult for international strategic investors to come forward despite a huge interest and willingness to park capital,“ said Samir Saraiya, cofounder at Digital E-life. Thatspersonal has raised $1 million from angel investors so far and is on the lookout for the next big cheque of $5 million.

Angel investors who have invested in some of these businesses are hopeful that funding will become easier in the coming days.

As a high margin business, they say there is significant scope for profitability which in turn may negate the need for elaborate funds as also open the doors of other asset classes as options. The key challenge remains getting the legal grey areas cleared, said Bindra who has invested in Thatspersonal.

“The legal bit is the one that needs to be resolved. If the grey becomes white, that's great and if the grey becomes black, then one may have to rethink the business. But the grey should not remain grey. That's the only challenge the sector should focus on,“ he said.